Labs In Court: A roundup of recent cases and enforcement actions involving the diagnostics industry

Ex-CEO of HDL Settles Bankruptcy Claims for $10 Million

Case: Health Diagnostic Laboratory co-founder and former CEO Tonya Mallory has agreed to pay $10 million to settle claims brought by the bankruptcy trustee in charge of liquidating HDL's assets. The case against Mallory is part of the trustee's larger $600 million suit targeting more than 100 HDL executives, directors, contractors and other defendants associated with the testing firm driven to bankruptcy by a massive kickback scheme involving bribes to physicians in exchange for orders of blood tests.

Significance: The newly approved bankruptcy settlement, which also covers her husband and former HDL shareholder, Scott, is far from the end of Ms. Mallory's legal problems. Last May, a federal court in South Carolina ordered Mallory and two principles of HDL's former contract sales organization, BlueWave Healthcare Consultants, to shell out $114.1 million after a jury found the three defendants liable for Medicare fraud for their part in the HDL scam. (See GCA, June 21, 2018, Case of the Month.) The defendants are appealing the verdict.

Former Patients Join the Legal Posse on the Trail of Theranos

Case: Nine ex-patients filed a class-action lawsuit against Theranos and its erstwhile retail partner Walgreens seeking damages for the harms they allegedly suffered as a result of inaccurate tests performed using Theranos diagnostic technology. The Arizona federal court dismissed seven of the claims but allowed the remaining 13 to proceed in a class action, which is currently in the evidence discovery phase.

Significance: Up to now, the Theranos case has been mostly about money and the financial losses suffered by consumers, investors and business associates as a result of the firm's overhyped bloodless finger prick technology. But the patient class action is a poignant reminder of the human and patient safety dimensions of the story. The alleged victims' accounts set out in the court papers document harrowing tales of mental suffering and unnecessary testing and treatment as a result of false positives for disorders like the autoimmune disease, Sjörgen's syndrome and the thyroid condition known as Hashimoto's disease, not to mention the patient removed from blood thinner medication warfarin on the base of flawed Theranos test results. At its peak, Theranos operated 40 consumer test centers within Walgreen's in the metro Phoenix area, performing over 1.5 million blood tests for nearly 176,000 consumers.

Florida Lab Pays $100K to Settle Claims of Violating Bioterrorism Law

Case: The OIG claimed that a Florida lab violated Federal Select Agent regulations by transferring a select toxin to an entity not registered to possess, use or transfer it and failing to get Centers for Disease Control and Prevention (CDCP) for the transfer. Rather than chance an administrative proceeding, the lab has decided to settle the case for $100,000.

Significance: Jointly comprised of the CDCP/Division of Select Agents and Toxins and the Animal and Plant Health Inspection Service/Agriculture Select Agent Services, the Federal Select Agent Program regulates possession, use and transfer of biological select agents and toxins that pose a threat to public, animal or plant health and products established in the aftermath of the 9/11 terrorist attacks to head off threats of bioterrorism.

Cancer Center Hit with $4.3 Million HIPAA Fine for Failure to Encrypt

Case: The University of Texas MD Anderson Cancer Center was on the wrong end of the fourth largest HIPAA fine ever dished out by the HHS Office University of Civil Rights for a trio of incidents between 2012 and 2013:

• An employee's laptop was stolen;
• A trainee lost a thumb drive; and
• A visiting researcher lost another thumb drive.

Result: Personal data of 33,800 patients was compromised.

Significance: Theft and loss of devices containing patient data is an all too common occurrence. What made this case different and egregious enough to warrant a massive HIPAA fine was that Anderson failed to encrypt the data. MD Anderson implemented an encryption policy in 2006 but didn't begin actual encryption of PHI on its computers until 2011, an effort that took over two years to complete. It argued that since the data was used for research purposes, HIPAA requirements didn't apply. But the HHS administrative law judge disagreed finding the Texas hospital's "dilatory conduct shocking given the high risk to patients resulting from the unauthorized disclosure" of digital PHI. MD Anderson says it plans to appeal the ruling contending that there's no evidence that any unauthorized party actually viewed the PHI.

Whistleblower Sues Montana Health System Officials for Elaborate Kickback Scheme

Case: The CFO of a Montana hospital physician network filed a qui tam lawsuit against his employer for paying physicians above-market compensation in exchange for referrals to network labs, hospitals, clinics and specialists.

Significance: The network, the biggest in Montana, denies the charges and contends that the Work Relative Value Units (WRVU) system it uses to measure physician productivity is the same method commonly employed by other hospitals across the country. But the CFO contends that the WRVU system is just a smoke screen to conceal payments based on referrals rather than productivity, citing among other examples, a neurosurgeon paid $900K per year even though collections for his services ranged from $207K to $374K, which is roughly the 10th percentile for neurosurgeons in national productivity metrics.